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What Every Board Member Should Know Abount
Contracts
Every Community Association regularly deals with a variety of
contracts. Those contracts could include management contracts,
lawn and snow removal contracts, trash removal contracts,
employment contractors, major construction contracts and insurance
contracts. The Board of Directors has the fiduciary obligation to
properly manage their communities, which requires the Board
Members to be familiar with all of their contracts.
The extent of an Association’s involvement with contracts must first start with a careful examination of the applicable governing documents. The Condominium Documents for a condominium and the Declaration of Covenants for a subdivision typically describe the extent of the Association’s obligation for the maintenance of the community. A Board must never enter into a contract in an area over which it has no maintenance responsibilities. For example, if the Association has no obligation to paint residential structures in a site condominium, it cannot enter into a painting contract for that purpose. It is recommended that every Board compile a list of those items for which it has maintenance responsibility, and ensure that its contracts only deal with those areas.
The Board should also adopt a clear procedure for dealing with contracts. First, it should develop specifications for the job to be performed. In doing so, it may be wise to hire a consultant to educate the Board on the nature of the “trade language” that would be involved in that project, and the items to be included in the job specifications. For repetitive types of repairs, those specifications could be used from year to year without much change. The specifications should include such things as defining the job to be accomplished, the restrictions as to how the job is to be done, the materials to be used and the timing of the work. For example, will there be restrictions on the working hours or the minimum number of workers on the job at any time? Will the contractor be expected to complete the work within a specific period of time?
Once the specifications have been developed, the procedure should the outline the method of obtaining qualified bidders. Referrals from other satisfied Associations are often valuable, as are recommendations from managing agents or material suppliers. Also, organizations such as CAI can be helpful in locating capable contractors. The same specifications should be given to all of the potential bidders, and providing them with a reasonable amount of time to respond.
If the Association is fortunate enough to receive multiple bids, the Board must then properly evaluate those bids to be sure that the contractors adequately responded to the specifications. While it is often tempting to accept the lowest bid, the Board should resist that temptation. Rather, all the bids must be carefully compared and evaluated and the choice should be the contractor who is expected to do the best job, but not necessarily for the cheapest price. We have seen numerous instances where the lowest bidder was not able to properly perform the contract, perhaps because they had misunderstood the specifications or because they intentionally bid low in order to get the job, in hopes that they could extract more from the Association during the course of the work. Often those contractors walk off the job before it was completed, or cut corners in material or workmanship.
The content of the contracts are also very important for the Board to understand. The parties have to be clearly identified and the description of the work must be detailed. If complete specifications are properly developed, those could be attached as an exhibit to the contract. The contract should also indicate when the work is to commence and when it is to be completed. There should be proper cancellation and penalty clauses. The Association should have the right to inspect the work before payment is made. It is my recommendation that an Association not pay a contractor for more than the work it has already performed. The materials to be used should be contained in the contract, as well as the location of the storage of materials and the clean-up at completion. The contract should also contain the minimum insurance requirements and that the contract provide a certificate of insurance to the Association. A hold harmless and indemnification provision should be included, and the contract should clearly indicate that the contractor is required to obtain the appropriate permits. Further, be sure that the contractor is properly licensed. Warranties should also be clearly set forth, as well as the method of compensating the contractor should additional work be encountered during the project. Also, the contract should include a provision requiring the Association to approve the use of any subcontractors that may be used on the project. In addition, the contractor should be required to comply with the Construction Lien Act by submitting a sworn statement regarding the various aspects of the work, and the issuance of waivers of liens. Major construction projects may also suggest the use of performance bonds, but the cost of that bond is typically included in the contract price.
In order to minimize the risks of legal complications with its contracts, the Board should carefully investigate the background and references of the contractor. And, as indicated above, the contract must be detailed. Too often we see Associations signing the contractor’s one page estimate or proposal. That should virtually never be done, and most contracts should be reviewed by the Association’s legal counsel before it is signed.
Many Associations rely upon municipal inspectors to verify the quality of the workmanship. Our recommendation is not to place such reliance upon the municipal inspectors. Rather, the Association should rely upon its own consultants or other qualified individuals to ensure the work is performed as required.
In summary, a working knowledge of contracts should reduce the likelihood of problem projects and the risk of expensive and protracted litigation.
Wayne G. Wegner Wegner and Associates, P.C.
23201 Jefferson Avenue St. Clair Shores, MI 48080
(586) 773-1800; (586) 773-1805 (fax)
Website: www.wegnerlaw.com
E-Mail: wwegner@wegnerlaw.com
The extent of an Association’s involvement with contracts must first start with a careful examination of the applicable governing documents. The Condominium Documents for a condominium and the Declaration of Covenants for a subdivision typically describe the extent of the Association’s obligation for the maintenance of the community. A Board must never enter into a contract in an area over which it has no maintenance responsibilities. For example, if the Association has no obligation to paint residential structures in a site condominium, it cannot enter into a painting contract for that purpose. It is recommended that every Board compile a list of those items for which it has maintenance responsibility, and ensure that its contracts only deal with those areas.
The Board should also adopt a clear procedure for dealing with contracts. First, it should develop specifications for the job to be performed. In doing so, it may be wise to hire a consultant to educate the Board on the nature of the “trade language” that would be involved in that project, and the items to be included in the job specifications. For repetitive types of repairs, those specifications could be used from year to year without much change. The specifications should include such things as defining the job to be accomplished, the restrictions as to how the job is to be done, the materials to be used and the timing of the work. For example, will there be restrictions on the working hours or the minimum number of workers on the job at any time? Will the contractor be expected to complete the work within a specific period of time?
Once the specifications have been developed, the procedure should the outline the method of obtaining qualified bidders. Referrals from other satisfied Associations are often valuable, as are recommendations from managing agents or material suppliers. Also, organizations such as CAI can be helpful in locating capable contractors. The same specifications should be given to all of the potential bidders, and providing them with a reasonable amount of time to respond.
If the Association is fortunate enough to receive multiple bids, the Board must then properly evaluate those bids to be sure that the contractors adequately responded to the specifications. While it is often tempting to accept the lowest bid, the Board should resist that temptation. Rather, all the bids must be carefully compared and evaluated and the choice should be the contractor who is expected to do the best job, but not necessarily for the cheapest price. We have seen numerous instances where the lowest bidder was not able to properly perform the contract, perhaps because they had misunderstood the specifications or because they intentionally bid low in order to get the job, in hopes that they could extract more from the Association during the course of the work. Often those contractors walk off the job before it was completed, or cut corners in material or workmanship.
The content of the contracts are also very important for the Board to understand. The parties have to be clearly identified and the description of the work must be detailed. If complete specifications are properly developed, those could be attached as an exhibit to the contract. The contract should also indicate when the work is to commence and when it is to be completed. There should be proper cancellation and penalty clauses. The Association should have the right to inspect the work before payment is made. It is my recommendation that an Association not pay a contractor for more than the work it has already performed. The materials to be used should be contained in the contract, as well as the location of the storage of materials and the clean-up at completion. The contract should also contain the minimum insurance requirements and that the contract provide a certificate of insurance to the Association. A hold harmless and indemnification provision should be included, and the contract should clearly indicate that the contractor is required to obtain the appropriate permits. Further, be sure that the contractor is properly licensed. Warranties should also be clearly set forth, as well as the method of compensating the contractor should additional work be encountered during the project. Also, the contract should include a provision requiring the Association to approve the use of any subcontractors that may be used on the project. In addition, the contractor should be required to comply with the Construction Lien Act by submitting a sworn statement regarding the various aspects of the work, and the issuance of waivers of liens. Major construction projects may also suggest the use of performance bonds, but the cost of that bond is typically included in the contract price.
In order to minimize the risks of legal complications with its contracts, the Board should carefully investigate the background and references of the contractor. And, as indicated above, the contract must be detailed. Too often we see Associations signing the contractor’s one page estimate or proposal. That should virtually never be done, and most contracts should be reviewed by the Association’s legal counsel before it is signed.
Many Associations rely upon municipal inspectors to verify the quality of the workmanship. Our recommendation is not to place such reliance upon the municipal inspectors. Rather, the Association should rely upon its own consultants or other qualified individuals to ensure the work is performed as required.
In summary, a working knowledge of contracts should reduce the likelihood of problem projects and the risk of expensive and protracted litigation.
Wayne G. Wegner Wegner and Associates, P.C.
23201 Jefferson Avenue St. Clair Shores, MI 48080
(586) 773-1800; (586) 773-1805 (fax)
Website: www.wegnerlaw.com
E-Mail: wwegner@wegnerlaw.com